A group of three conservatives on President Obama’s financial crisis inquiry commission called the final report of the panel “unbalanced” and “incorrect,” in a 27-page dissent from the more than 500-page document endorsed by a majority of members.
“By focusing too narrowly on U.S. regulatory policy and supervision, ignoring international parallels, emphasizing only arguments for greater regulation, failing to prioritize the causes, and failing to distinguish sufficiently between causes and effects, the majority’s report is unbalanced and leads to incorrect conclusions about what caused the crisis,” said the dissent.
The dissent (read the full document here) was authored by commission Vice Chairman Bill Thomas, a former Republican congressman from California, commission member Keith Hennessey, former chairman of the White House National Economic Council under President George W. Bush, and Douglas Holtz-Eakin, a former director of the Congressional Budget Office who was a top adviser to Sen. John McCain during his presidential campaign.
The Daily Caller obtained a copy of the dissent Wednesday night, in advance of the commission’s release of its full report on Thursday.
The dissent says that the majority report is “more an account of bad events than a focused explanation of what happened and why,” but they also say it arrives at the conclusion that more regulation of the financial sector could have prevented the crisis of 2008 and the resulting recession, which is still affecting the economy.
The minority report pegs much of the blame instead on global imbalances in capital between East and West, as China and India sent massive amounts of cash West from the late 1990’s onward, allowing asset bubbles to grow in Europe and the U.S.
The presence of real estate and securitized asset bubbles in Europe as well as the U.S. is one of two reasons that the minority dissent argues that the crisis could not have been caused primarily by the financial system that is unique to the U.S.
“Any explanation that relies too heavily on a unique element of the U.S. regulatory or supervisory system is likely to be insufficient to explain why the same thing happened in parts of Europe,” they write.
They also place emphasis on the personal responsibility of investors, creditors, regulators, homebuyers, and politicians, who they say were the causal agents of the crisis because of bad decision-making.
Although the minority dissent was not joined by any of the 10-member commission’s moderates or liberals, it does not arrive at the same conclusions about the causes of the financial crisis that many conservatives have.
The three “reject as too simplistic the hypothesis that too little regulation caused the crisis, as well as its opposite, that too much regulation caused the crisis.”
While they reject the idea that more regulation could have solved things, they also downplay the role of Federal Reserve Chairman Alan Greenspan and the way he kept interest rates low for many years. They also say that the focus of government agencies on encouraging higher levels of home ownership through the Community Reinvestment Act was not “a significant cause.”
“Both the ‘too little government’ and ‘too much government’ approaches are too broad-brush to explain the crisis,” the dissent states.
A majority of the commission’s 10 members, led by liberals chairman Phil Angelides, the former state treasurer of California, and Brooksley Born, former chair of the US Commodity Futures Trading Commission (CFTC) during the Clinton administration, are expected to vote for the official report.
Commission member Peter Wallison, a former White House counsel to President Ronald Reagan, is authoring a separate dissent that places much of the blame for the crisis on the Community Reinvestment Act and the government’s use of Fannie Mae and Freddie Mac to finance home loans for high-risk borrowers.
Thomas, Hennessey and Holtz-Eakin also defend the bailouts of Wall Street firms in late 2008, which many will say is not surprising given the fact that Hennessey was part of the brain trust at the White House that consulted on those matters with then-Treasury Secretary Henry Paulson.
“For a policymaker, the calculus is simple: if you bail out AIG and you’re wrong, you will have wasted taxpayer money and provoked public outrage,” the dissent said. “If you don’t bail out AIG and you’re wrong, the global financial system collapses. It should be easy to see why policymakers favored action–there was a chance of being wrong either way, and the costs of being wrong without action were far greater than the costs of being wrong with action.
The three conservatives also use their “global crisis” emphasis to discount the primacy of monetary policy at the Federal Reserve under Greenspan.
“U.S. monetary policy may have contributed to the credit bubble but did not cause it,” they write.
And they say it is also a red herring to blame complicated financial instruments such as mortgage-backed securities, credit default swaps or collateralized debt obligations.
“Some focus their criticism on the form of these financial instruments,” the minority writes. “They argue that complex financial derivatives caused the crisis. We conclude that the details of this engineering are incidental to understanding the essential causes of the crisis. If the system works properly, reconfiguring streams of mortgage payments has little effect.”
“While many involve the word ‘derivative,’ it is a mistake to bundle them together and say, ‘Derivatives or CDOs caused the crisis,’” they write. “In each case, we assign responsibility for the failures to the people and institutions rather than to the financial instruments they used.”